Crypto 101 The differences between altcoins and tokens

Crypto trading has been in practice since Bitcoin’s release in 2009 and more digital assets emerged to join the economy. However, there are major key differences between what kinds of cryptocurrencies are being traded. The terms ‘altcoin’ and ‘token’ are great examples of confusion you can encounter when talking about digital assets. 

Altcoins and tokens are both cryptocurrencies but they are fundamentally different from one another. It boils down to what the terms mean, how each of them works, and what is expected from either type of digital asset. Here are the three main differences between altcoins and tokens for new investors and generally confused owners alike.

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Purpose of the two assets

Choosing between altcoins vs tokens can be simplified by knowing what the crypto is expected to do. Every digital asset is created with a distinct purpose and it dictates what kind of tools and resources the developers need to use when making them. Thus, both altcoins and tokens will have mutually exclusive functionalities. 

What are altcoins made for

Altcoin is short for ‘alternate coin’ referring to its position as a substitute for the first cryptocurrency, Bitcoin (BTC). It serves the simplest function of being decentralised money. Altcoins can be a mode of payment if any entity or platform supports it and they can be a store of value, allowing investors to profit from crypto volatility. 

Litecoin (LTC) is the best example of this because many people treat it like a cheaper BTC. Its blockchain is hardforked from the original Bitcoin network with systems that made it more scalable, have faster transactions and cheaper fees, and have better support for add-on software. 

What tokens are made for

Tokens are cryptocurrencies designed to serve a specific purpose. Most of them can be traded in exchanges for fiat or other crypto and many of them can serve as digital money if they are popular enough. However, their original intended use makes them more valuable as a resource than as a currency.

You can find a variety of tokens with their unique uses in Ethereum, one of the largest networks hosting a variety of blockchains using its infrastructure. Its native currency, Ether (ETH), is the universal utility token, a kind of resource used for authorising actions or to pay for fees. It is a token but ETH is popular enough to be used as money for certain activities like gaming at Gamdom. Cryptocurrencies minted on the Ethereum network but circulating their respective blockchains are called ERC-20 tokens and each one has its own uses. 

Structure of the two assets

If you want to get into the technical side of the discussion then you’ll find even more key differences between altcoins and tokens. The way their blockchains are set up is to serve the currency’s purpose and some systems that worked for one cannot be found on the other. Here’s a deep dive into the differences in structures between altcoins and tokens. 

Altcoin is built on a hard fork or its own blockchain

Most crypto altcoins circulate a standalone blockchain that is either built from scratch or hardforked from Bitcoin’s network. That’s why many of them work exactly like BTC but with their own respective solution to the original crypto’s issues. Most of them are isolated and need individual updates to keep up with the economy. 

There are thousands of blockchains hardforked from Bitcoin but only a few were recognised by exchanges worldwide. There’s Litecoin being the best one out of all of them and Lucky Coin (LKY) which is mostly forgotten now. Dogecoin (DOGE) is forked from the latter and became a big hit among Bitcoin traders, too, making it one of the most accessible and adopted altcoin. 

Ripple (XRP) is an example of an altcoin that wasn’t forked from Bitcoin and it was never designed to compete or have the same functions. It circulated a standalone blockchain called RippleNet which was designed to help modern banks instead of replacing them. Thus, money transferring services can use the speed and cost-efficiency of a decentralised network instead of relying on a centuries-old logistics system. 

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Tokens are built on an existing blockchain

Second-generation blockchains like Ethereum are more complex than Bitcoin and its forks. It is the foundation of various projects which introduces new functions to the network and its existing decentralised applications (dApps). Crypto tokens are made to fulfil those functions and thus they have to be made on the same blockchain that they need to serve. 

Ethereum has approximately 450,000 ERC-20 token contracts in a study conducted in 2022 and most of them are made for specific dApps. They all benefit from updates on the network like the Ethereum Merge that happened in 2022. 

How their economies work

Both altcoins and tokens are part of the big crypto economy but there are smaller trends that can affect them individually. How that happens is directly related to how their blockchains are built and the kind of functions that each of them was meant to serve. It’s an important factor to consider if you’re comparing tokens vs altcoins for widening your portfolio.

Altcoins’ value are independent of each other

Every altcoin is valued independently as money or their role in the circulation of wealth in the economy. Bitcoin remains at the top of the markets because of its high demand and its active contribution to institutional investments. Altcoins follow the same trend in which their value is determined mostly by the demand for their assets.

Tokens’ value is tied to those of the same blockchain

Tokens are also volatile like Bitcoin and altcoins but they are valued primarily depending on the success of the blockchain they are circulating. After all, there won’t be a need for them if the platform they are meant to serve isn’t going to be used. Thus, tokens also follow the laws of supply and demand but the one being valued is the project or platform they are used for, not the assets themselves.

FAQs

Choosing between altcoins vs tokens is rich with questions and here are some popular ones:

How do altcoins work?

Altcoins work in the same way as Bitcoin. They circulate a blockchain where users can earn them, usually through mining or trading, then be used as mode of payment or store of value. To start, users need a crypto wallet with an interface that can interact with the blockchain and assets. Wallets store private keys which act as the user’s signature for authorising sending altcoins from their account to another. 

What are crypto tokens?

Crypto tokens are digital assets designed for specific purposes. This includes utility tokens used to authorise actions, non-fungible tokens minted official copies of an object/data, or governance tokens for casting votes. Owning them also gives a user prestige in the blockchain’s community while using them enacts their decisions on the network.

How do crypto tokens work?

Crypto tokens work like any cryptocurrency. You own them through an account made using a wallet where you keep private keys necessary to authorise their uses. You can transfer tokens to another account via the blockchain similar to altcoins but you can also send it to a dApp or network as a resource. 

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Words: Clarence Clarke